Prospects Daily: Euro Area industrial output falls most in three years in September, India’s inflation eases in October

Financial Markets…Germany’s government sold €4.3 billion ($5.5 billion) of 2-year bonds at a negative yield of minus 0.02% the second time on record and down from 0.07% when comparable debt was auctioned last month, amid strong demand for the nation’s debt. The first negative yield debt was sold in July.

Italian borrowing costs fell to a two-year low as the country sold €3.5 billion ($4.5 billion) of 3-year bonds. The new debt was priced to yield 2.64%, lower than the 2.86% at the last auction of similar-maturity debt in October. Italy also sold €1.5 billion of bonds due in 2023 and 2029, the first bond issue with a maturity of longer than 15 years since May 2011.

Developing-country stock markets advanced on Wednesday, with the benchmark MSCI Emerging Market Index gaining 0.2%, as Chinese banking shares led the rally. The gauge bounced back from a two-month closing reached yesterday, with Chinese and Taiwanese shares rising 0.4% and 0.3%, respectively. In contrast, the benchmark indices in Brazil and Russia declined.

High-income Economies…Retail sales in the US fell 0.3% (m/m) in October, the first monthly decline in four months, following a 1.3% increase in September, partly due to the disruption caused by hurricane Sandy which hurt sales in some parts of the US, but also from consumers’ concerns that taxes could go up next year as part of negotiations to avoid the US “fiscal cliff”.

Euro Area industrial production fell 2.5% (m/m) in September, the most in three years, following a 0.9% increase in August, amid a weakening Eurozone economy and fiscal austerity that have cut into demand. The fall in Eurozone output was led by double digit declines in Ireland (-12.6% m/m) and Portugal (-12% m/m), but industrial output in core economies Germany and France also fell, by 2.1% and 1.8% respectively. On a quarter-over-quarter annualized basis, Eurozone industrial growth slowed to 1.2% (3m/3m saar) in September from 1.8% in August.

Greece’s economy sank deeper into recession as its GDP contracted at a faster pace of 7.2% (y/y) in the third quarter of 2012, compared to a drop of 6.3% in the second quarter, amid sweeping austerity measures including wage and pension cuts and tax hikes that have added to the economic misery.

Portugal’s economy contracted for the eighth straight quarter, with GDP falling 0.8% (q/q) in the third quarter, following a 1.1% fall in the second quarter, even as the government implemented austerity measures to rein in deficits and debt. Portugal’s unemployment rate rose to 15.8% in the three months through September from 15% percent in the second quarter.

Unemployment in the UK fell 49,000 between July and September to 2.51mn indicating a marginal improvement in the labor market even as the economic outlook has worsened. The Bank of England pared its GDP growth forecast for 2013 to 1% and predicted a sharp fall in Q4 output as the boost from summer Olympics is reversed. Developing Economies…Chile's central bank left its policy interest rate unchanged at 5.0% stating that domestic output and demand performed better than forecast while inflation at 2.9 (y/y) in October was in line with the 3% annual inflation target.

India's headline wholesale price inflation eased to 7.45% in October, down from 7.81% in September, which was the slowest pace in eight months on moderating food prices. Inflation expectations remain elevated on a pass through of fuel subsidy cuts.

The central bank of Mozambique cut its benchmark interest rates by 100 basis points to 9.50% in its sixth rate cut this year, stating that inflation at 1.8% in October remains well below the central bank's 5.6% percent annual inflation target.

South Africa's retail sales growth weakened to 4.3% (y/y) in September from 6.7% in August, reflecting the impact of strikes and weak economic activity. On a monthly basis, retail sales declined 0.5% in September following a 2.1% increase in August.

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